Author: David

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College is Crazy Stupid

Posted on by David

College is crazy stupid. Don’t get me wrong, Courtney and I both went to college. In fact, I delayed getting an engineering job and went back to get my master’s degree so that Courtney could finish her degree. College is great, and college degrees are *almost* necessary to succeed in life. Bachelor’s degree holders earn about $32,000/year more than those with just a high school diploma (source). The problem isn’t necessarily college, it’s the crazy stupid approach we take to college.

Borderline Predatory Recruitment Strategies

Imagine you’re a high school senior, 17 years old. Colleges are circling like buzzards, filling your mailbox and inbox with spam about how “our college is the right place for you, <insert name here>!” It’s up to you to make the decision on where to spend 4 years of your life (nearly 8 in my experience) and probably 6 figures. You’re not even legally an adult yet.

Take my Alma Mater for example. I went to the University of Nebraska, and as an in-state public university tuition was $6,956.70 annually. Room and board were about $8000/year and books were about $500/year. I spent 5 years getting my engineering degree (STEM degrees often takes longer than other degrees because of all the labs.) So that comes out to $77,500 to go to college. That’s a huge amount of money. If I had gone to Colorado School of Mines like I had originally planned, it would have cost between $140,000 and $175,000 depending on if it took 4 or 5 years to graduate!

Come to college here, we have shiny toys

And how do colleges usually recruit 17 year-olds? They often tell you about their campus: how pretty it is, what kind of clubs there are, how active the student union is, etc. They’ll show off their rec center or their sports leagues, and they try to convince you that you’ll “fit in” at their college. They act like parents in a particularly nasty custody battle: “Come with me, I’ve got shiny new toys and a house with a pool!” But literally none of that matters. The only thing that matters when going to college is whether or not this really expensive experience will give you the ability to get a job afterwards.

Unless you are the heiress of a multibillion dollar company, the only reason to go to college is to get a job afterwards. We are going to talk about how not all majors are equal in the next article (On how to do college right), but suffice it to say that colleges will sell you a totally useless degree in a totally useless major simply because you’ll pay for it. The job you can get with your degree, and how hard it will be to get said job, should be weighed very heavily.

The mom on Titanic understands the purpose of college
If you are an heiress, I guess you can get your MRS degree.

So if getting a job afterwards is the most important reason to go to college, the most important criteria you should be judging a college based on is academics, job placement, and how it looks on a resume. The second most important criteria is cost. Picking a college based on how pretty its campus is is like buying a house solely based on the color of the paint: not a great plan.

The Avenger's know a bad plan when they see one

Small Private Schools

When it comes to recruiting foolish 17 year-olds, small private colleges are the worst offenders. They boast a tight knit college experience with a low student to faculty ratio and a pretty campus that really appeals to high school seniors who are social creatures used to small classrooms. But to get this community experience, you have to pay through the nose. The average private college costs more than three times as much as a public state university (source). And unless you’re going to Harvard, the chances are that your small private college won’t look as good on a resume as your public university anyways.

If you are a recruiter for a tech firm and you’re looking for engineers from around the state, chances are that the local university in town has a program you are familiar with and you trust their system. You’ve probably interviewed and hired graduates from that program before and you know basically what to expect.

If you interview a recent graduate from some small college 100 miles away, they may have a good resume and good GPA, but you probably aren’t familiar with their school’s program. It may be a great engineering program, but you don’t know how well it covers the subjects you care about or how hard they grade classes. Whether it’s right or wrong, a recruiter is going to go with what they know and will most likely be biased towards the graduate from the university they’re familiar with.

A Real World Example

I have some friends who went into teaching. Some of them went to the University of Nebraska, and some went to smaller private colleges. The Lincoln Public School system (LPS) hires dozens of teachers a year. The majority of them graduated from the University of Nebraska. LPS is very familiar with the university’s teaching college. They know what to look for and exactly what they’re getting. For better or for worse, my friends who got teaching degrees from schools other than the University of Nebraska didn’t end up getting a job offer from LPS.

With Crazy Prices to Match

There are two problems with college:

  1. Teenagers usually pick a college based on how it feels to them or how much fun they had on the campus tour.
  2. They are supposed to shell out six figures to pay for it.

Teenagers are rarely expected to make any decisions for themselves, much less hundred thousand dollar decisions. We can’t even expect them to think one year into the future, much less multiple decades. Kids are impulsive, short-term thinkers who are very susceptible to peer pressure. Why are we trusting them to make hundred thousand dollar decisions basically on their own?

Also, how are they going to pay for it? Unless their parents are pretty well off and they get scholarships, they’re going to have to get student loans. Long gone are the days where you could work part time and summers and make enough to pay for college. Unless you have a lot of circumstances go right you’re going to have to get a loan.

Student loans are dangerous

Over 20% of current student loans are held by baby boomers. That’s over $336 billion owed by people over the age of 50. Their average student loan amount is $40,000/family, which is really depressing considering the average cost of tuition in 1990 was only $4000/year (source). Imagine paying student loan payments every month for 30 years and still having more debt than you started with. That’s equal parts crazy and disheartening. You can see the need for financial Independence.

When you apply for a regular loan, you put something down as collateral. Something roughly equal to the value of the loan as a pledge so that the bank can be assured that their interests are protected. When you get a mortgage for a house, you put the house down as collateral. That way if you fail to pay your debt, the bank can sell your house to cover it.

The bank also requires you to have an income. When we bought our house, they required bank statements from all of our accounts, two months of paychecks to ensure we had a job that could afford the house, and a statement from our bank saying we’ve had the money a while, that we didn’t just get it recently. There are a lot of hoops to jump through to get a mortgage. If you don’t have a job, even if you have the money to buy the house outright, no bank with give you a mortgage. Even if you are retired with a million dollars, it is really hard to get a $200,000 mortgage.

Imagine you’re about to graduate high school and you go to the bank and ask for a $100,000 loan.

Loan Officer: What do you have for collateral?

17 year old: I’ve got an Xbox and that’s about it.

Loan Officer: OK, let me see your bank statement.

17 year old: I’ve got a thousand dollars in my checking account

Loan Officer: Um, do you have two months of pay stubs?

17 year old: Yep, I’ve been working part-time at McDonalds for the past year making about $600/month

Loan Officer: HAHAHAHA good joke. REJECTED.

That’s literally how it would go. And yet we hand out six figure loans to any Joe Schmo who says they’re going to college. These student loans are given without a thought as to how the borrowers will pay them back because they are guaranteed by the federal government. Student loans can’t be expunged via bankruptcy and if the borrower defaults on the loan we, the taxpayers, will foot the bill.

Ain't nobody got time for that
Honestly though, it’s so much work to get a mortgage

We’re the collateral

According to Investopedia: “As of July 8, 2016, the federal government owned approximately $1 trillion in outstanding consumer debt, per data compiled by the Federal Reserve Bank of St. Louis. That figure was up from less than $150 billion in January 2009, representing a nearly 600% increase over that time span. The main culprit is student loans, which the federal government effectively monopolized in a little-known provision of the Affordable Care Act, signed into law in 2010.”

The reason banks can offer tens of thousands of dollars to children without collateral, income, or prospects, and who may not even want to go to college, is because they can. Since the taxpayers are ultimately on the hook for loan, it’s free money. It doesn’t matter whether Joe Schmo gets a high paying job or not. They still get the money. It doesn’t even matter if Joe drops out of school. The bank still gets the money. Investopedia also estimates that the government loses between $100 and $250 billion/year due to student loan costs.

I find I agree with Ron Swanson more every day.
As a taxpayer I’m kind of annoyed

Conclusion

College is not stupid, but the way we are doing it is. We sell kids the complete wrong thing when it comes to what they actually need out of going to college. And then we charge them exorbitant amounts of money to get that college degree. What can be done? First, we need to learn how to do college the right way (under the current system). This is a short term solution. Secondly, we need to discuss how to fix the current system. The next two articles will be discussing those two solutions, so be on the lookout for them.

What do you think? Is college really this crazy or am I an alarmist? Are there any crazy things my list is missing? Let us know in the comments below.

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How to read an Index Fund Fact Sheet (Part 2)

Posted on by David

In part 1 of this post we looked at the summary tab of the fact sheet for Schwab’s Total Stock Market Index Fund, SWTSX. We looked at share price, expense ratio, dividends, and returns. In this post we’re going to discuss what is actually in the index fund and how to track its performance.

Buy all the Stocks

Like the name implies, an American total stock market fund holds all of the publically traded companies in America. But each company isn’t weighted the same. If it were you would be buying the same amount of Crocs (the weird shoe thing) as you would be Apple or Facebook. You may want to do that, but in general Indices are weighted so that you are more invested in bigger, more stable companies that are less likely to go bankrupt.

One of the upsides of this weighting is that as companies grow and shrink so do their weight in the index. This mean that a company that is growing very fast will become worth more in the index thus causing your investment to grow faster with it. And companies that lose value lose their weighting in the index so they don’t bring your down with them.

So how can you tell how the index fund is weighted? If you click over to the portfolio tab you’ll get information about the fund’s holding. First you’ll see a map showing you where the fund’s companies are located. In this case they are primarily located in North America which makes sense for a total US stock index. To the right you’ll see the total assets and holdings. This fund holds 3,366 companies for a total of $17 billion. The nice thing about a total stock index is that your investment will never go to zero because it’s virtually impossible for all 3,366 companies to go bankrupt at the same time. (And if they do you’ll have more important things to worry about)

What companies are in my fund?

The portfolio tab gives a list of the top 10 holdings of an index fund.
Top 10 holdings of SWTSX. Most of them are FAANG stocks.

Below the map is a list of the top 10 holdings. You’ll see familiar names like Apple, Microsoft, Amazon, and Facebook. Alphabet Class A and C are both Google shares. You’ll hear a lot about the FAANG stocks in the news and you can see here that they make up a good portion of the total stock market. So when they go up it’s good news for you! Number 7 is Tesla so if you wanted to get in on the massive Tesla craze, but didn’t want to invest $700 for a single share, you can just by investing in a total stock index.

At the bottom you’ll see that the top 10 holdings consist of 22.68% of the entire fund. This is due to how the fund is weighted. Apple alone makes up 5% of the 3,366 companies. That’s how rich of a company Apple is. Just remember that next time you buy an iPhone. (Google makes up 3.5% so there’s that…)

So when you feel pressured to invest in Tesla or Amazon or anyone of the big names posting ridiculous gains, remember that a total stock index fund or an S&P 500 index fund is investing in all of these big names, but without the risk that comes from investing in a single company. Putting $10,000 into this index fund is equivalent to investing $314 in Amazon. But you also have 3,365 other companies that can help balance your risk.

Fund Performance

Now for the most important part: how did the Index fund perform? If you go over to the performance tab it will show you the returns over specific time intervals (YTD, 1 day, 1 month, and 3 months) as well as annualized returns for 1 year up to 15 years.

The Performance tab gives the returns over specific time intervals.
Average annual returns for SWTSX over several intervals

You can see that the 15 year returns are lower than those of the 1, 3, 5, and 10 year stats. This is because the 2008 financial crises is now more than 10 years behind us. Since 2009 we’ve been in the longest bull market in history. (It technically ended in 2020 with Covid, but as you can see from the 1 year returns, Covid hasn’t really hurt the stock market like we initially thought it would in March of 2020.)

Benchmarks

Below SWTSX you can see the returns for the S&P500 TR USD index. TR stands for Total Returns. It includes dividends as well as capital gains. This is the benchmark which Schwab is measuring against. The two diverge a little bit because the Total Stock Market Index isn’t the same as the S&P 500 Index, but they share much of the same investments since they are both weighted by the value of the richest companies.

Below that you’ll see the Large Blend category. This is the average returns of all the mutual funds consisting of top companies. Remember from the last post that SWTSX is considered a Large Blend fund so this screen compares the fund to the average returns of funds in its category. You can see from this comparison that the average Large Blend fund lags SWTSX (and the S&P 500) in every time span.

So what this is saying is that you have a better chance of making money by just investing in this total stock index fund than you do by paying some fancy fund manager to invest for you. Here is a list of Morningstar large blend funds. What you’ll notice looking at the list is that their Expense ratio is somewhere around 1%. That means you’re paying 1% in fees to get 1% less returns over a 15 year time span. If you had $100,000 invested in both SWTSX returning 10.82% and the average Large Blend mutual fund returning 9.83% with a 1% expense ratio, After 15 years the SWTSX fund would have $111,132.70 more in it. Expense Ratio fees are the worst! Which brings us to…

Fees

Why is the average expense ratio so high?
You can view your expense ratio compared to the category average.

If you go over to the Risk & Tax Analysis tab it will show you the projected returns over your time intervals when accounting for taxes. It will give you the pre-liquidation and post-liquidation estimates which are just the estimated returns based on taxes.

Schwab notes that the “Numbers are adjusted for possible sales charges, and assume reinvestment of dividends and capital gains over each time period.” And “Pre-liquidation (before sale of shares): includes taxes on fund’s distributions of dividends and capital gains. Figures based on highest Federal income tax bracket. State and local taxes are not included.”

This isn’t really interesting to us since the majority of typical middle class Midwestern families use an IRA or 401(k) to invest in the stock market. And if you are using a taxable brokerage account to invest in index funds you’ll likely have long term capital gains. You also won’t be in the highest Federal income tax bracket anyway so these values aren’t super helpful.

But what is helpful is the fees section at the bottom. You’ll see that the gross expense ratio and the net expense ratio are equal. This is normal for index funds. You’ll also see the Morningstar category average. Remember the list of Morningstar large blend funds? We estimated that they averaged about a 1% expense ratio. That looks to be a pretty good back of the napkin guess as the actual average is 0.83%. The average large blend mutual fund costs 27% more in fees and nets you a whole percentage point less in gains! A lose-lose situation. Fees are the worst.

Conclusion

In this 2-part post we discussed how to read an index mutual fund fact sheet. We learned how to navigate the sheet to determine expense ratios, returns, and dividends. We also saw how to determine a fund’s holding and see if it was performing well against its stated goal.

What do you think? Does this help make it easier to understand fund sheets? Let us know in the comments below!

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How to Read an Index Mutual Fund Fact Sheet

Posted on by David

If you’ve been reading this blog and you read posts like What Investments to Actually Buy you’ve probably got an idea of why index funds are the way to go for the average Joe investor. They’re simple, plentiful, and, most importantly, cheap! But how do you know what you’re actually investing in? In this post I’ll show you how to read an index mutual fund fact sheet.

Let’s say you’ve decided to invest in the Schwab Total Stock Market Index Fund. If you google that, it’ll bring you to a page that looks like this.

Fund Details from SWTSX
Fund Details Page looks like information overload!

The first thing you may notice is the bold jumble of letters: SWTSX. This is called the ticker symbol. It usually tries to represent the name of the company or fund it symbolizes. For example the Ticker symbol for Google is GOOGL. SWTSX stands for SchWab Total Stock indeX. It sort of makes sense.

The next line has the NAV or net asset value. The NAV is the price of one share. If you want to buy one share of this fund today it will cost you $77.68. But since this is a mutual fund you don’t need to buy whole shares. If you look down towards the bottom of the picture you’ll see the minimum investment requirements. In the case of this index fund the minimum investment is $1. This isn’t always the case for index funds. For example Vanguard’s total stock index fund (VTSAX) has a minimum initial investment of $3000.

Expense Ratio (Less is Better)

Next to NAV is the daily change. The index went down 0.05% yesterday, boo. With mutual funds, they are bought and sold only once per day at 4 p.m. Eastern Time, after the market closes. This is different than ETFs or exchange traded funds. ETFs can be bought and sold on the market floor many times throughout the day just like an individual stock.

Next you’ll see what’s arguably the most important number: the Net Expense Ratio. This is also called the Management Expense Ratio or MER. The expense ratio for SWTSX is just 0.03%. That means for every $10,000 you have invested Schwab will take $3.00. Remember the average actively managed fund has an expense ratio of 1-2%. That’s a fee of $100-$200 for every $10,000 invested. So 0.03% is not bad at all!

The next section is the year to date (YTD) return. So far as of 7/31/2021 SWTSX has returned 17.23%. This means if you invested $10,000 into SWTSX on January 1st, by now you have made $1,723 in gains. The overall market average for the last 100 years has been about 10% so 2021 has been a good year so far for investors.

Below these under Fund Strategy, you’ll see the goal of this index fund. “The investment seeks to track the total return of the entire U.S. stock market, as measured by the Dow Jones U.S. Total Stock Market Index.” The goal of SWTSX is to track the Dow Jones U.S. Total Stock Market Index. Seems straight forward enough. This is why it is so cheap. You’re not paying any fund manager to attempt to pick the winning stocks, they’re just following a publically available index.

Performance and Dividends (More is More)

Above fund strategy you’ll see a graph of the fund’s performance over the last 10 years. If you had invested $10,000 into SWTSX in August of 2011 it would have grown to over $40,000 by now. Schwab compares that to two other options the S&P 500 TR and the average Large Blend fund. We’ll discuss this more later.

In the details to the right you’ll see some of the same information as we’ve seen above. It also includes the distribution yield. The distribution yield includes the dividends and capital gains and is seen as a percentage of the NAV In this case it’s an average of the last 12 months of dividends and capital gains divided by the price of the stock. Under that you can see that the most recent distribution was $1.0805/share. I you divide $1.0805 by $77.68 you get 1.39%.

Dividends and Distributions Page from SWTSX
Dividends and Distributions showing when pay day is

If you click over to the Dividends and Distributions tab under fund performance it’ll show you the distributions over the value of the stock shares. If you hover over the points you’ll see that this fund pays its dividends and capital gains at the end of December. This is pretty common. Most companies pay dividends quarterly, but most index funds usually just save this up and pay them out at the end of the year.

Risk vs. Reward (Equal is More)

Summary from SWTSX
I thought I calculated the risks, but man am I bad at math

If we scroll down the page you’ll get the names of the account managers and how long they’ve been managing the fund. This doesn’t matter for an index fund because the manager’s only job is to see that it follows the index. For an actively managed fund the manager’s job is to pick winning stocks so his history and experience with the fund is important. Why would you trust your money to someone who’s only been doing it for a couple years and never seen a stock market crash?

To the right of that you’ll see the Morningstar rating. This is considered a Large Blend fund. Large meaning mostly large capital, big companies, and Blend meaning a blend of stable companies like Johnson and Johnson and ones that have seen considerable growth like Amazon.

Then there’s the Portfolio weightings. This says that 26.92% of this index fund is in Information Technology like Apple, Microsoft, and Netflix. The next biggest weighting is in health care which makes sense because health care will always be needed. Financials is mostly banks which are usually pretty good at making money (you gotta have money to make money I guess).

Down at the bottom you’ll see the risk vs reward meters. The historic return and the historic risk are both above average. This makes sense since stocks are risky and risk and reward are usually well correlated. If you see a fund that has above average return and below average risk, you should be wary of it, and if you see a fund with high risk and low reward, you’re probably better off investing elsewhere.

Conclusion

We’ll finish this up next post discussing what’s actually in this index fund and how to see if it’s performing well against the stated goal.

What do you think? Does this help make it easier to understand fund sheets? Let us know in the comments below!

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Chance Doesn’t Exist

Posted on by David

Sorry I haven’t posted for a while. We had a sickness go through the home and I just didn’t feel like writing. This post is way more esoteric than the usual “how to save money” article, but it’s something I’ve been thinking about lately. Statistics are 100% true but only under the variables at which they were measured. Any application or inference drawn from a statistic is by definition false, because not all the variables can be accounted for. The application may be useful, but it’s not true like the statistic itself is. This is because chance doesn’t exist.

When a study is performed or survey is conducted, a specific group is sampled. The facts about this group are compiled into statistic. These statistics are true for that specific group at that specific time. The design is usually that the sampled group is representative of the whole and therefore applications drawn from that statistic may be useful for the whole. But since not everyone is sampled, the resulting statistic isn’t true for everyone. It is only true for the sampled group. It is only true for that specific group at that specific time. This means it is not 100% true for you now.

A Coin Flip

Here’s an example of what I’m saying. Statistically a coin flip is 50-50 heads or tails. If someone flipped a coin 100 times and got 50 heads and 50 tails you’d say that makes sense. Someone will then say, based off this statistic, that a coin flip has a 50% chance of landing on heads and 50% chance of landing on tails. But that’s not true.

The reason it’s not true is because chance itself is not a factor for causing a coin to flip or land. The factors include: your thumb, the amount of force you exert upon the coin, the angle at which you flip it, the density of the air it’s falling through, whether there’s a sudden gust, etc. All of those are variables affecting the process of flipping the coin.

We call it chance because we don’t know or account for all the variables (and sometimes we can’t even know them all!), but all those variables are deterministic in nature. Meaning if the variables are controlled for, the outcome is determined. If you are able to flip a coin with the same amount of force, at the same angle through air which has the same density etc. you will get the same result every time. This is because nature is deterministic.

Stanford coin flipping machine
Coin flipping machine – Source: Stanford

In fact researchers at Stanford actually did this (Source). They built a machine that could flip a coin with repeatable force and angle and found that “With careful adjustment, the coin started heads up always lands heads up – one hundred percent of the time. We conclude that coin-tossing is ‘physics’ not ‘random’.”

So does that mean that you can’t use a coin flip to make a 50-50 choice? No, it works fine. Because humans are good at introducing extra variables into their actions, it’s a good approximation of chance. It’s close enough that it’s useful, but it’s not explicitly true that if you flip a coin it will have a 50% chance of landing on heads or tails. This is because chance does not exist. The world is deterministic.

80% of Students Change their Major

Another example is the statistic that about 80% of college students change their majors at least once sometime before graduation. This statistic is 100% true, for those specific students at that specific time. Roughly 80% of the people surveyed changed their major at least once. But there’s no true application that can be gathered from it. You could say that based on past results a college freshmen is likely to change his major, but you cannot say to that college freshmen that he has an 80% chance of changing his major.

The reason you can’t say that is because chance isn’t a factor of collegiate study decision. The factors include: interest, drive, stick-to-itiveness, finances, input from friends and family, etc. If this freshmen loves his current chosen field, and has the drive and financial abilities, He is likely to stick with it. He does not have an 80% chance of switching majors. Whereas someone who doesn’t have an interest in college and just signed up for whatever program their parents recommended is much more likely to switch majors.

What we call chance is just our inability to account for all the variables.

A quick sum up (so far)

These two examples have two entirely different sets of variables so their outcomes are going to be different. But still their outcomes are based on the variables affecting the mechanisms (factors) that drive results. The issue is that chance doesn’t affect results because chance isn’t a mechanism that drives results. What we call chance is just our inability to account for all the variables.

Statistics may be true, but the applications drawn from them are not. They have varying degrees of usefulness. Consider the application that if you flip a coin, you will get a random 50/50 result. That application is not true, but it is very useful because empirically the answer usually comes out close to 50/50.

The application drawn from the statistic that 80% of college students change their major, that you have an 80% chance of changing your major, is less useful. It’s not entirely un-useful, but the mechanisms that drive collegiate study decisions are much more varied than a coin flip. And there are many more variables that come into play.

Covid-19

Let’s now look at an example that is very applicable to everyone currently: Covid statistics. Why do some people catch Covid and some don’t? Why does Covid affect some people so badly while others are completely asymptomatic? We don’t know a lot of the variables that surround Covid infections, but we do have lots of statistics.

In the US 1.7% of Covid cases resulted in death. What application can you draw from that? If you said, “If you catch Covid 19 you have a 1.7% chance of dying from it” you have missed the point. The only helpful applications we can draw are that Covid is more deadly than other similarly contagious viruses that have lower mortality rates.

Saying that if you catch it you have a 1.7% chance of dying from it just isn’t true. It also isn’t helpful since it ignores all the variables at play. Early in the pandemic the mortality rate was higher, implying that a given person is less likely to die from Covid now than they were in April of 2020. We also know that variables of age and health are big factors. A young healthy individual is much more likely to survive Covid than an old fat one.

But either way neither one has a “chance” of dying of Covid because chance never killed anyone. There are factors behind death and those factors are affected by many variables. Many of those variables are still yet to be pinned down. For example there are healthy young people who have died of Covid and unhealthy old people who have been asymptomatic, and we don’t know why.

Purity of Science

What we do know with 100% certainty (assuming the statistical data collection methods are true) is that 1.7% of Covid cases in America have resulted in death. We also know that the world is deterministic. If the same variables affect the same situations the results are the same. This is why Physics is considered a pure science. There are relatively few variables. We know that if something with a known mass is launched from earth at a known force and angle, it will land at a known location. It’s very reproducible.

Biology and medicine are less pure sciences because they have more variables. If you set up the same experiment with two different people, you can have wildly different results because the human body has millions of mechanisms that are each affected by millions of variables. Social sciences like psychology or sociology make biology look like a pure science because of their massive amount of variables. But like anything else in this world, there is still no chance. The absence of chance is what makes science possible. The fact that the world is deterministic makes experiments repeatable. We may not be able to account for all variables, but we can draw inferences from them. We just need to be clear that the inferences are always untrue. They may be useful, but they are always untrue.

How does this relate to FIRE?

FIRE utilizes a lot of statistics. The 4% rule is based on statistics, the believe that the stock market will produce an average annual gain of 7% is based on statistics. The average retirement age, income, cost of living etc. are all based on statistics. These statistics may be true, but the applications drawn from them are not. They may be useful, and you can use them as guidelines to model your financial independence plans after, but everyone is unique.

The trinity study gives investors a certain chance of surviving their retirement even though chance doesn't exist.
Safe withdrawal rates as a function of portfolio allocation Source: Early Retirement Now

According to the Trinity Study, if you have a portfolio of 75% stocks and 25% bonds and you withdraw 4% of your portfolio per year and increase with inflation, you have an 88% chance of your money lasting 50 years. But as I’ve been saying, that conclusion is false because chance doesn’t exist. The Stock Market has its own factors that affect how it produces returns. Also we as investors have our values and variables that affect the mechanisms by which we spend money.

If you are already good at adjusting your spending for when times are tough, a stock market correction early into retirement won’t affect you as much as it would someone who can’t reign in their spending. What I’m saying is you don’t have a “chance” of things turning out a specific way. You have control over it. Obviously there are things outside of you control, but nothing is outside of control. The universe is deterministic because God is sovereign. Control what is in your sphere of influence and leave to God all that isn’t (and all that is as well).

What do you think? Was this post too esoteric? Should I have stayed sick longer? Let us know in the comments below!